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Modeling Cashless Exercise and Redemption Features in SPAC Warrants

Article Quant Q&A · Author: PBD10017
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Summary

The document outlines two differences between private and public SPAC warrants after an initial business combination: private warrants may allow cashless exercise and may be redeemable by the issuer. It gives a cashless exercise share formula based on the warrant count, strike, and average share price over the preceding ten days. It also describes redemption at a stated cash amount when the share price lies within a specified range, intended to prompt holders to exercise.

The text raises how to incorporate these contractual features into valuation, including whether to use separate tree or Monte Carlo models and whether redemption behaves like a barrier. It does not provide a pricing method or worked valuation. The terms described are presented as common features, but actual warrant contracts can differ, so modeling requires the specific agreement's exercise and redemption provisions.

Key ideas

  • Cashless exercise determines shares delivered using the warrant count, strike, and a recent average share price.
  • Private SPAC warrants may include issuer redemption rights that differ from public warrants.
  • A redemption trigger can influence holder exercise decisions before the issuer redeems the warrants.
  • The document identifies tree and Monte Carlo methods as possible modeling approaches but does not resolve which to use.

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Full text
# Cash less exercise and redemption feature in SPAC warrants


# Cash less exercise and redemption feature in SPAC warrants












Public and private warrants of a SPAC post merger (Initial Business Combination or IBC) are often very similar. Notable differences are 1) cashless exercise of the private warrants and 2) redemption feature of the private warrants.



$$N_S = \frac{N_W (P_{10Avg} - K)}{P_{10Avg}}$$

Where $P_{10Avg}$ is the average price for the last 10 days. The public warrants don't provide for the cashless exercise.

- Redemption feature. The issuer of of the warrants (the company) can redeem the warrants for $0.10 if the stock price is between \$10 and \$18. The public warrants do not have the \$18 cap. This feature is designed to force the warrant holders to exercise as at any time the stock price is above \$11.6 (11.5 + 0.1) the holder will be better off exercising (which they have 30 days to do) than having the company redeem.

How would one model these features? Do I need two separate trees or MCs for cash and cashless exercise? How does the redemption feature fit in? Some kind of barrier?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.